Restrictions on Umbrella employee expenses
Prior to April 2016, it was possible for Umbrella employees to utilise a wide variety of expenses to reduce their tax bill. By far the most popular expenses were travel and daily meals (these were known as subsistence expenses). Other common expenses, included:
- Mobile phone
However, effective as of that date, HMRC legislation came into effect restricting the claiming of these expenses for any contractor deemed to be operating in a manner analogous to that of a permanent, full-time employee. The test applied to determine if this was the case was that of supervision, direction and control (SDC).
This brings tax treatment of contractors in line with those of permanent employees, who are unable to claim the costs of ordinary commuting or meals purchased while at work as an expense on their tax returns. In a nutshell, no “compliant” umbrella company is able to process non-chargeable expenses for tax relief purposes.
SDC – Supervision, direction and control
HMRC have determined that a worker operating under supervision, direction or control while at work should be treated in the same manner as a permanent employee for tax purposes. In essence this means that, as a full-time employee cannot claim meal costs or travel to and from the office as a tax-free expense, neither can a contractor working in the same environment.
Supervision refers to operating underneath a manager, supervisor or another individual with the authority to oversee your daily work. This also applies to anybody with the authority to take disciplinary action against you and even working in an environment where you receive guidance or assistance from colleagues.
Direction refers to instructions as to how you carry out your work. A contractor is deemed to have complete freedom over how their work is completed – anybody given guidance as to the manner in which they work is considered to be under direction.
Control refers to another person having the authority to dictate what you do at any given point during your working day. If you can be moved to another task or site, or told to work on something else, you’re considered to be under control.
Are any other expenses claimable?
The short answer is no – not any more. Whereas Umbrella companies were previously able to allow contractors to claim many expenses in addition to travel and subsistence, this is no longer the case. Expenses can still be paid – but these must be approved by your recruitment agency and paid over in addition to your normal daily or hourly pay rate. This matches the treatment that permanent, full-time employees can expect – expenses must be submitted, approved and reimbursed on top of salary. These are known as chargeable expenses.
It is worth noting that expenditure incurred solely for the purposes of your work can still be claimed on a tax return through HMRC – for example, if you’re required to purchase tools, uniform or equipment in order to work, you can still claim tax relief on these at the end of the year even if your engager won’t cover the cost. Our sister company Dolan Accountancy offers a reduced cost Self Assesment tax return service, for Contractor Umbrella employees.
Are there exceptions?
Imagine yourself as a permanent employee and think about what scenarios could you claim for expenses. It is exactly the same for an umbrella employee. For example;
- Mobile workers – i.e. those who are required to travel away from their main place of work, are able to claim travel and subsistence expenses for any such duties. This is analogous to expenses claimable by permanent employees if you need to take a trip to visit a client or complete off-site work, mileage or travel costs and meals are reimbursable as tax-free expenses.
In short, ordinary commuting is disallowable – that is, travel to and from your normal place of work. Any exceptional travel is still permitted to be reimbursed as a tax-free expense. The costs of accommodation where you are required to stay overnight for the performance of your duties is also allowable.
As above, expenses must be approved and paid by your recruitment agency – due to the tightening of legislation, a compliant umbrella company will not allow you to claim these directly through them.
Does this only apply to Umbrella employees?
The short answer is no – although contractors operating through a Limited company are able to claim a wider range of expenses, they’re still restricted from claiming these expenses when operating inside IR35. To find out more about IR35 please read our article on What is IR35?
If I can’t claim expenses, why should I use an Umbrella company?
Although HMRC have restricted the claiming of expenses as an Umbrella company employee, it still remains an attractive option for freelance or contract workers for many reasons, including;
- Insurance provided by the umbrella company, for more information on Contractor Umbrella’s policy please read: Contractor Umbrella insurance.
- All matters relating to tax and National Insurance are taken care of – there’s no need to complete a tax return if all of your income is through your Umbrella company
- Compliance with all applicable legislation
- Hassle-free – the sign-up process is simple, and administration with your agency and client is taken out of your hands
- Best advice – through the Dolan Contractor Group, you’ll receive impartial advice as to whether you’ll be better off with a limited company or as an umbrella employee. If you are a client of Dolan Accountancy you can use Contractor Umbrella margin free for any assignments that better suit umbrella employment
For further information, please see the benefits of Contractor Umbrella.